Mr. Blanchard asserts that developing trends indicate that Chinese manufacturers have lost their luster not only because of the recent very well documented quality challenges and other indiscretions such as counterfeiting, but because labor is no longer as cheap as it once was. I would also add that the cost benefit is further minimized by the increasing cost of transportation and carrying cost of inventory due to long lead times.

The article cites a new study conducted by Booz Allen Hamilton and the American Chamber of Commerce (AmCham) Shanghai which finds more than half (54%) of the U.S. companies surveyed believe that China is losing its competitive edge to other low-cost countries in manufacturing.  "The manufacturing philosophy employed by many foreign multinationals in China is in need of an overhaul," says Ronald Haddock, vice president, Booz Allen. "China's changing cost and currency structure have shifted, forcing companies to rethink how they structure their Chinese operations and how they perceive China in their overall global strategy."   In that same survey, 17% of the respondents say that they're seeking other countries with even lower wages and labor costs than China, with Vietnam ranking at the top of the list of alternatives, followed by India.

This constant focus of finding the lowest cost provider is short sighted.  Just as in China the economics of these low cost countries is one of basic supply and demand.  As demand increases the qualified labor supply will invariably shrink driving overall labor costs up.  The study reinforces the shortsightedness of this mono dimensional approach by finding that despite all of the challenges of sourcing from China, the vast majority (83%) of multinationals currently in China plan to stay in China.  Companies that pursue China as both a growth market and a market for lower-cost labor and integrate these operationally, enjoy significantly higher profits than companies pursuing just one of those objectives.  In addition, companies that employ dual sourcing and sales strategies report an average profitability rate two-thirds higher than those focused on just one of those objectives (29.6 percent compared with 17.8 percent). 

Despite the real returns of expanding the China strategy beyond the basic three noted above, only one out of four companies is able to combine a strong in-country market growth effort with their manufacturing and sourcing operations. As a result, they are looking elsewhere for their next cheapest partner continuing the never ending allusion that low cost production alone is the elixir for profitability.